CXOs, cos rush to modify Esop terms to include Covid realities

Mumbai: Senior executives at some of the top listed Indian entities, unicorn startups and private equity (PE) backed companies who earn millions in employee stock option plan (Esop) are all set to see their earnings go down drastically due to coronavirus. In last few days some of the top companies, PE funds and senior executives have reached out to their advisors on the impact of the epidemic on their Esops and earnings. Many top executives have conditions attached to the number of Esops that they get as part of the salary and how much of that they can vest annually. Some of these companies and senior executives want the Esops plans to be modified to include the Covid-19 reality. In most cases earnings from Esops is based on certain variables depending on the companies. For some of BSE 500 companies CEOs and senior executives have to achieve certain revenue, share price, Ebitda targets every year, which would not be possible due to Covid-19 and the shutdown that followed.For some of the PE backed companies and unicorn start-ups, the valuations itself have seen huge change and shareholders may want to change the parameters of Esops. Industry trackers say that while in most cases the annual earnings from Esops will drop for most executives in the current financial year, many are looking at changing the terms of contract. Industry experts say that in most cases Esops vesting depends on achieving certain performance conditions. These conditions could include profit margins, sales, Ebitda margins, earning per share among other things. “Many CXOs who have their salaries linked to Esops, where they have performance linked clauses, will see a substantial impact on their income due to Coronavirus. In some cases companies may look to change the parameters of performance as some of the earlier growth numbers may be irrelevant in the post-Covid economy,” said Harshu Ghate, Co-founder and CEO, Esop Direct, an equity compensation advisory firm. Industry trackers say that some of the larger listed companies are also looking to restructure salaries of some of the high performing employees—even at mid-level. The new salary structures would include more of Esops and less of cash components. This, say experts is mainly done to avoid slashing salaries of these employees but at the same time conserve cash. “All companies are looking to conserve cash and so many of them are also exploring if they can restructure the compensation and reduce the cash component by giving Esops to employees as part of their package instead of enforcing a salary cut. While the share prices are down and therefore the value of Esops may look to be low, it is a long term instrument and so the upside will come in the medium to long term. We could see several senior management executives opt for some level of share based compensation, said Sai Venkateshwaran, head – CFO advisory, KPMG in India. Industry trackers say that in some cases the parameters of Esops performance are being modified to include peer comparison and increasing the number years to achieve a particular revenue, market share or profit targets. These modifications are also being done in unicorn start-ups and PE backed companies.